What Led Vale SA to Beat Market Expectations in 1Q16?

What Led Vale SA to Beat Market Expectations in 1Q16?

Vale SA beat 1Q16 expectations

Vale SA (VALE) reported its 1Q16 results on April 28, 2016. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) came in at $2.0 billion. That was 32% higher than the consensus EBITDA. Higher realized prices for iron ore and lower-than-expected costs in the base metals division were the main drivers behind the beat.

Strong operationally

Vale’s operational performance was strong in 1Q16, as we saw in our previous series on Vale’s 1Q16 production numbers. Vale set several production records for 1Q16:

• total iron ore production of 77.5 million tons

• nickel production of 73,500 tons

• copper production of 109,900 tons

As expected, Vale’s 1Q16 was a seasonally weaker quarter. Its net revenues of $5.7 billion were 3% lower than 4Q15. This was offset to an extent by higher realized prices for iron ore fines.

Outperformance YTD

With stronger iron ore prices, iron ore miners have recuperated their losses. On a relative basis, Cliffs Natural Resources (CLF) has outperformed its peers with a YTD (year-to-date) rise of 216% as of April 29. Vale has shown the next-best performance with a YTD rise of 79%.

Cliffs has other drivers behind its rally, such as improving sentiment in the US steel market, its main customer focus. Among seaborne-exposed names, however, Vale has risen the most. Fortescue Metals Group (FSUGY) has risen 74%.

Rio Tinto (RIO) and BHP Billiton (BHP) (BBL) have risen 14% and 12%, respectively.

Vale is highly leveraged to iron ore prices compared to BHP and RIO, given its lack of commodity diversification and higher financial and operational gearing. This led to Vale’s relative outperformance in a rising iron ore price environment.

In this series, we’ll take a close look at Vale’s earnings for 1Q16. We’ll also discuss the management team’s outlook for the business and see how it’s trying to position the company in this volatile commodity price (COMT) environment.

Let’s start by looking at Vale’s iron ore division and why it outperformed expectations.

Continue to Next Part

Browse this series on Market Realist:

• Part 2 - Why Did Vale’s Iron Ore Division Outperform Expectations?

• Part 3 - Will Vale’s Focus on Costs Improve Profitability in Coal?

• Part 4 - What’s Vale’s Outlook for Base Metals in 2016?